Setup cost is those costs incurred to configure a machine for a production run. This cost is considered a fixed cost of the associated batch, so its cost is spread over the number of units produced.
Setup costs include the following:
- Labor to position tools and materials next to the machine
- Labor to configure the machine
- Scrap cost of test units run on the machine
The real cost of a setup is the time wasted while a machine is not operational, since this can represent lost income (if there is a backlog of work). Consequently, there is usually an emphasis on shortening equipment setup times in order to reduce setup costs.